Abuses in the funeral assurance market are rife, and the Financial Services Board (FSB) knows it. It’s a matter of time before a class action is brought against the regulator or a life company.
This is the view of Advocate Chris Shone, who was part of the team of advocates who argued the bread distribution price-fixing case earlier this year in the Constitutional Court. This was the first class action to be fought successfully in South Africa. Small-scale bread distributors, represented by Imraahn Ismail Mukaddam, brought the case against bread producers Pioneer Foods, Tiger Brands and Premier Foods.
At a recent seminar hosted by consulting firm Burns-Hoffman and Associates, Shone identified possible class actions that could be brought against the FSB or the long-term insurance industry.
Shone says the bread cartel case has opened the way for class actions in South Africa, and if a “class” or group of people who meets the legal criteria to bring an action can be identified, it is likely they will obtain a settlement from a party that is found to be responsible for the damage or loss they suffered.
About 95 percent of class actions in the US in which a class is certified – in other words, meets the legal criteria of a class – are settled, Shone says (see “Understanding certification”, below).
“It’s a very powerful threat,” he says.
Obvious abuses in the funeral industry have been allowed to continue for many years, but, until now, the victims have not been able to take legal action, because the harm they have suffered has been too small to justify individual claim.
A class action is one involving an abusive practice on a large scale, and it is about “hundreds of Davids taking on Goliath, who is pulling off small rip-offs on a large scale and making massive profits”, he says.
The funeral assurance market is ripe for class actions, particularly in three areas where policyholders are the victims of illegal practices, Shone says.
The Long Term Insurance (LTI) Act does not refer to “funeral policies” but regulates them through “assistance policies”, which are life policies with a maximum benefit, Shone says. The maximum benefit was recently increased from R18 000 to R30 000, because the FSB found that, with the lower limit, consumers were being sold multiple policies.
“No person may conduct the business of an insurer without being registered and authorised, meaning no person may issue an assistance (funeral) policy unless registered as an insurer,” Shone says.
He says the three areas where policyholders are victims of illegal practices are:
1. No cash benefit. Many funeral assistance schemes provide a funeral only, but no cash benefit, and this is a contravention of the LTI Act, Shone says.
“The LTI Act requires that any policy benefit expressed otherwise than in a sum of money – such as a funeral service – must nevertheless be available as a sum of money equal in value to the cost the insurer would have incurred had the benefit been provided otherwise than as a sum of money. In short, a policy providing a funeral benefit only is invalid, and a cash benefit must always be available,” he says.
Members of a funeral scheme where the benefit is a funeral service only, without a cash alternative, would be capable of bringing a class action, Shone says.
2. No underwriting by a registered long-term insurer. The LTI Act stipulates that an entity must be registered and authorised to conduct the business of an insurer, and if someone has issued a policy that has not been underwritten, you, as the policyholder, may cancel the policy and claim your money back from the insurer.
Many funeral policies are issued by entities that are not underwritten by a registered insurer, Shone says.
Many schemes are re-insured, rather than underwritten, but this does not satisfy the requirements of the LTI Act, and such schemes are therefore in breach of the Act, he says.
(In insurance terms, an underwriter would be the direct insurer, and a re-insurer insures the underwriter’s risk, Shone says.)
All members of any funeral scheme where the policy has not been underwritten by a registered insurer could lodge a class action, he says.
3. Payment of benefits to the wrong person. Insurers are required by the LTI Act to pay cash benefits to a nominated beneficiary or the deceased’s estate, but many entities that offer funeral assurance pay benefits directly to other parties, such as undertakers. This contravention of the law “is a real problem and applies to illegal insurers, as well as registered insurers”, Shone says.
A class action could be brought by a beneficiary under a long-term policy issued by a funeral scheme or assurer that has paid the benefit to someone other than the beneficiary, such as an undertaker.
It could also be brought by an executor of an estate where the deceased held a long-term policy issued by a funeral scheme or assurer where there was no beneficiary nomination and where the benefit was not paid to the deceased’s estate.
OTHER PROBLEMS WITH FUNERAL ASSURANCE SCHEMES
There are many problems with funeral assurance in addition to the three that could be grounds for class actions. Advocate Chris Shone says the problems are:
* No contractual provision for premium increases. Shone says that life assurance companies can increase premiums with or without notifying policyholders, while the benefit is not increased. “If your premium is going up by 15 percent a year and it’s R20 a month now, in five years it will be R40 a month, but you still only get a lousy R5 000 funeral benefit,” he says.
* Cover is from month to month. “This means the cover can be cancelled by the ‘insurer’ at any time, and that if the policyholder fails to make payment, cover terminates and all is lost,” he says.
* No paid-up values. Funeral assistance policies do not provide a surrender value, Shone says. “You stop paying, it’s over. With [some] other insurance products, you get a paid-up value or surrender value when you stop paying. A formula is applied to work out the value; you don’t lose everything. In this game, you lose it all.”
* No insurable interest. Insurance companies in the United States have been sued for not establishing whether, in fact, a person who takes out a policy had an insurable interest in someone else’s life, Shone says. “Here we don’t care. No one checks who has an insurable interest in whom,” he says.
* Double underwriting. It is common for an undertaker who has issued a funeral policy to approach two life assurers and re-insure the policy twice, Shone says.
“The policyholder doesn’t know this. When the policyholder dies, both insurers get a death certificate – and you can get around the originals, because everyone certifies everything these days. The undertaker uses one payout to do the funeral and pockets the other. It happens a lot.”
* Actuarially unsound premiums. Shone says it is not uncommon for a funeral scheme to consist of a bakkie, a hearse and a couple of machines. Apart from that, there are no assets and no reserves.
“In the event of a flood of claims, the business would go bust and there would be no means of recovering money for policyholders. Long-term insurers have to have reserves or re-insurers – not in this business,” he says.
* No “pre-paid” funeral plan. Shone says an assistance policy provides cash to meet the costs of a funeral, but it is not a pre-paid funeral plan, which is the perception among many consumers in this market.
* Excessive commissions. Commissions in the funeral assistance business are exorbitant – they can exceed 30 percent of the premium, Shone says. Funeral assistance is the biggest sector of the insurance industry, but the commissions are not regulated.
* Premiums are payable for life. “Generally, this is the case, which is fundamentally flawed. With an escalating premium, you’re going to be paying, at age 99, probably R5 000 a month for your R5 000 funeral benefit. It makes no sense.”
Shone suggests that premiums be made payable for a certain term until the age of retirement, but that the benefits remain in place until death.
‘FAILURE TO ACT EXPOSES FSB TO LEGAL ACTION’
The failure by the Financial Services Board (FSB) to take action against unregistered funeral assurers exposes the regulator to a class action from policyholders who have suffered damages, Advocate Chris Shone says.
“Does the function of the FSB extend beyond simply issuing warnings? Does the FSB not owe consumers a duty of care? By not closing down unregistered ‘insurers’ of which it is aware, can the FSB be held liable for any damages suffered by members of these unregistered schemes?
“If the FSB is aware of an unregistered ‘insurer’, surely it is bound to act? Failure to do so could give rise to a claim consequent on an omission and a breach of the duty of care. Damages would include any sums lost by members of the unregistered insurer by paying premiums to the scheme,” Shone says.
Jonathan Dixon, deputy executive for insurance at the FSB, says that, in addition to warning the public about unregistered insurers, the regulator “carries out inspections and takes regulatory action” against illegal funeral scheme operators.
The FSB has concerns about the abuse of consumers who use funeral schemes and is “looking at how to engage with insurers selling products through funeral parlours”, Dixon says.
National Treasury proposed a Microinsurance Act to regulate funeral assurance, but, with the introduction of the “twin peaks” model for regulating the financial services industry, a different approach will be adopted.
“We’re hoping to bring in provisions through rules by the middle of next year. These rules will provide for product standards to define microinsurance; simpler solvency requirements; and more proportionate fit-and-proper requirements under FAIS [the Financial Advisory and Intermediary Services Act] for people selling microinsurance products.”
These provisions will make it easier for illegal operators to comply with the law, Dixon says.
Shone says that a recent amendment to the Financial Services Board Act is aimed at granting the FSB and its officials immunity from liability for losses or damages caused in the performance of their duties.
By removing from the Act the words “grossly negligent” – with reference to the regulator’s conduct – the FSB is essentially absolved from most liability, Shone says.
But Dixon says the purpose of the amendment was to “bring the Act in line with the norm for other regulators and is in no way exceptional”.
Shone says the FSB is not known for being proactive, “invariably only getting involved when all has already been lost”.
As an organ of state, the FSB can be held to account for failing to discharge its statutory obligations adequately, he says. “What other purpose does the FSB have apart from regulating the financial services sector?”
Dixon says the powers granted to the FSB are accompanied by accountability. “The FSB is subject to ongoing oversight by, and accountability to, National Treasury, the Minister of Finance and Parliament,” he says.
To be able to bring a class action, “certification” is required, which means the applicants (the would-be claimants) have to apply to a court for the certification of a “class”. The criteria for certification include:
* Numerosity. Your class needs to be significant in size. Considering that most funeral assistance schemes have more than 1 000 premium-paying members, this would not be a problem, Advocate Chris Shone says.
* Commonality. All class members must be in the same boat for the class to be certified. For example, either the entire book is underwritten, or nothing is underwritten, Shone says. “Policy wordings are generally identical, the only difference being age-related premium rates and waiting periods.”
* Ascertainability. Your members need to be “objectively identifiable”.
* Triability. Your case must have a reasonable prospect of success.
* Typicality. A policyholder launching a claim must have a claim typical of all other members of the scheme.
* Adequacy of representation. An individual policyholder who launches a claim should represent the interests of any class of claimants, provided the claim is not unique to that individual.